The danger of the euro falling is a very real one
IN RECENT weeks, certain people have begun to think the unthinkable and to prepare for life in a world without the euro.
The idea of a break-up of the eurozone is no longer dismissed as fanciful. Indeed, European leaders, including Taoiseach Enda Kenny, have been lining up to warn of the grave threats to the currency union.
However, they are united in warning that such a development could have severely negative, if not cataclysmic consequences.
British Prime Minister David Cameron may have used the veto at this week’s Brussels summit over the issue of the future regulation of the City of London, but his administration has been to the fore in warning of the dangers to the British economy of an implosion in the euro.
The British Chancellor, George Osborne, has expressed the view that Britain’s economy would contract by 7% in such an event — the event, in other words, would be equivalent in its impact on Britain to that of the Lehman Brothers collapse back in September 2008, and Britain is not even a member of the eurozone. However, Austin Hughes, economist with KBC Bank believes the impact of a break-up would be more like “17 times Lehmans”.
Some believe that such an event, coming at a time of such fragility in the global economy, would be the signal for a breakdown in the global financial system, triggering a perma-frost that could put the Great Depression in the ha’penny place. In other words, we really do not want to go there.
THE MECHANICS OF A BREAK-UP
Washington DC-based economist Anders Aslund has suggested: “It is time to think the unthinkable and at least, prepare for the euro’s collapse.”
He suggests that the ideal model for a dissolution of a monetary union is that of Czechoslovakia, which was partitioned between the Czech Republic and Slovakia in 1993.
The koruna vanished, making way for two currencies which, for an initial period, were pegged.
Both economies have performed well since then.
Aslund accepts that three other currency zone break ups, those of the Soviet Union, Yugoslavia and the Hapsburg empire, did not end happily.
The result was hyperinflation, destruction of the value of peoples’ savings and a massive loss of output.
There are strong reasons to believe that a eurozone break-up would be difficult.
The more countries involved — there are 17 in the eurozone — the greater the disruption.
Europe’s policy-making institutions have also fallen short and there has been “an absence of any thinking, or legislation about the break-up”.
On the plus side, the euro countries have central banks “which should greatly facilitate the process of recovery of their old functions”.
The euro is barely a decade old so the Irish Central Bank should have officials with experience of running a national currency.
There are reports that our central bank has been in touch with printing companies, a sign that preparations are being made for the rainy day.
Moreover, the existing stock of euro notes are divided along national lines.
Any move to restore the punt, however, would have to come swiftly if the eurozone was unravelled, or once the powers that be decided that Ireland had no future in it. This is because capital would flee the country in droves in anticipation of a currency restoration — assuming the currency would sink in value.
How such controls could be implemented in today’s high-tech, instant-transfer world remains to be seen.
Firms would face a huge task renegotiating contracts, trying to ensure that markets stay open, that vital supplies could be accessed.
When Ireland’s reputation hit the floor last year, many exporters and importers found life tough as suppliers and customers shied away, while the cost of export insurance went sky-high.
John Whelan, Irish Exporters Association chief executive, says the picture is very different today. The country’s reputation has improved and, as a result, exporters are once again getting credit insurance at competitive rates.” Insurers are actually promoting new products.”
But a euro break-up would reverse of such gains.
Much depends on whether the break-up of the eurozone is confined to a few countries or involves a dissolution of the Union.
He believes that initially, there would be considerable demand for US dollars, but that the lesson from the post-Communist countries is that people would soon accept their new currency. However, acceptance would cost borrowers dearly.
“To begin with, interest rates would have to be higher... so as to attract funds, keep inflation down and give the new currency stability.”
Under a controlled break-up, Irish borrowers would be expected to secure a restructuring in their debts which would otherwise rise well beyond levels considered sustainable.
An uncontrolled break-up would be catastrophic for the financial system, much of which would be swept by a tsunami of bad debt.
Austin Hughes says “we simply do not know” what might happen if the euro were to disappear.
Even if the euro were to remain and Ireland left, the legal relationship between Ireland and the eurozone remains unknown.
The fallout is taking the form of a fall-off in corporate activity that has resulted in the shelving of the sale of Irish Life and the postponement of Eircom’s recapitalisation.
EURO CRISIS: THE IRISH RESPONSE —
There are reports that multinational firms are planning ahead to meet inthe event of a euro demise.
CRH chief executive Myles Lee has confirmed that his company is making contingency arrangements.
However, Felix O’Regan of the Irish Banking Federation says: “A euro break-up is not on our agenda... as to what individual institutions may be doing, I don’t know.”
IBEC has declined to speculate, reluctant to fan the flames, no doubt.
Both bodies run the risk of being accused of complacency, or at least of not wishing to contemplate “appalling visas”, to paraphrase the British jurist Lord Dennning.
According to John Whelan, 94% of his members had no plans to meet the event of a break-up.
“In discussions, people point to a difficulty in coming up with a credible alternative.”
“The general feeling is that it will be sorted — hence, the 94% response.”
Anders Aslund warns that should a meltdown become inevitable, then it is the states that stay on to the bitter end in a collapsing monetary union who suffer worst from hyperinflation. Food for thought, indeed.
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